Although the company has no debt, its net loss is increasing, while Palantir is stronger.
Oliver Rojanko
summary
- C3.ai is operationally undervalued compared to Palantir and is unlikely to outperform its competitors, but it may have good long-term returns.
- Despite not being profitable yet, C3.ai's balance sheet shows stable financial management, but more effective cost management is needed to achieve profitability.
- If defense and intelligence demands increase during escalating global conflicts, C3.ai may face changes in resource allocation. This can also affect shareholder returns.
C3.ai Inc. (AI, Finance) is operationally undervalued in the market, mainly due to the presence of strong competitors like Palantir Technologies Inc. (PLTR, Finance). I believe that if investors invest in this stock now, they will earn decent returns over the long term, but I don't expect them to be higher than Palantir's returns.
As such, we think investors will want to consider the similar risk-reward profiles of both companies and then evaluate Palantir's higher growth prospects. Both investments involve a bit more risk than other established players, so my own preference is to choose allocations that can result in significant growth.
Analysis of companies and AI market
C3.ai is one of the lesser-known but still important companies operating in the artificial intelligence industry. The company specializes in enterprise AI, and has notable competitors in this space such as Salesforce (CRM, finance) and Palantir. The company's flagship product, C3 AI Suite, provides the development, deployment, and operations of AI applications, with a focus on enterprise data management to drive efficiency and cost-effectiveness.
The company offers a significant set of products and services, but it's hard to tell how unique its offering is. Therefore, I think the company could be easily replicated and fall prey not only to more established and profitable companies, but also to startups like Palantir that potentially have some advantage in capabilities. thinking about. C3.ai's strategic partnerships are strong and include Microsoft (MSFT, Financial) and Adobe (ADBE, Financial), but these partnerships are becoming increasingly common for enterprise AI companies. I don't think it's anything particularly special.
That said, the executive team is formidable, with Chairman and CEO Thomas M. Siebel forming Siebel Systems, which merged with Oracle (ORCL, finance) in 2006. Its rich history in application software sets the stage for veteran-level talent. Awareness to apply time-tested lessons to these new and burgeoning AI tools. I don't mean to underestimate his Siebel experience and accolades, but how he keeps his C3.ai competitive when AI is literally the hottest business field in the world. I doubt it. It seems to me that even a large, powerful company with a hierarchy of executives with decades of technology knowledge can be overwhelmed by other companies just by being lucky enough to implement it at scale. It seems that there is a sex. For example, Salesforce appears to be a company that has the potential to decisively corner the retail AI market and establish itself as a major provider fairly early on. Even though C3.ai can offer better and more comprehensive tools than Salesforce, I don't see the idea that C3.ai will take back some of the market that Salesforce seems to have already captured. It seems thin.
There's also Palantir, which I believe surpasses C3.ai in the US defense space. C3.ai is contracted by the U.S. Department of Defense, Defense Innovation Command, and U.S. Air Force and is part of the Joint Artificial Intelligence Center project. This raises concerns about how these AI technologies will be used and whether C3.ai could be pulled in a direction that could potentially conflict with corporate customers for national and international defense during wartime. I am.
In my own view, Palantir provides complexity, security, and compliance management, even if C3.ai prioritizes government defense obligations for corporate interests, and C3.ai in the defense space at this point. exceeds. Palantir believes he has some operational advantage just because of his experience in the field since it was founded six years ago.
financial analysis
C3.ai is not yet profitable, but I think this presents some opportunity for investors. That's because typically when a company starts reporting steady earnings, the broader stock market starts to take notice and boost the company's valuation. But investing heavily in stocks also comes with the risk of skepticism.
In many ways, the capital structure is commendable. That's because the company doesn't have typical debt. However, it has moderate lease debt and other debt, which contributes to its equity ratio of 0.84. I think this is a high number and indicates strong financial management that will eventually lead to stable earnings. Additionally, the company's business with a portfolio of high-end clients, including government contracts, shows signs of stable earnings in the future. The good news is that C3.ai's revenue is growing at a healthy rate. It's understandable that C3.ai invests heavily in research and development, and its operating costs and cost of goods sold are increasing rapidly along with its revenue. However, I believe C3.ai needs to take more stringent efficiency measures to generate sustainable profitability. What doesn't help is that C3.ai's 59% gross margin is decreasing, while Palantir's 81% margin is increasing. The unfortunate reality right now is that while C3.ai's revenue is increasing rapidly, its net loss is increasing as well.
C3.ai has a market cap of about $2.5 billion, and Palantir's market cap is $47 billion. So it's safe to say that C3.ai has a lot to catch up on. Given that C3.ai's gross margin is as pressing a problem as it is, C3.ai is purchasing at a lower scale, which could result in higher purchasing costs for the development of its products and services. Additionally, the company does not have full-stack AI and data services like Palantir and has less in-house development capabilities, which could increase its cost of goods sold.
value analysis
Based on my analysis, it's no surprise that Palantir trades at a higher valuation multiple than C3.ai. Here we can see evidence of the efficient market hypothesis at work. To be clear, my own position is that markets are efficient, but clearly not perfectly efficient. We've also seen evidence that the smaller a company is, the more likely it is that inefficiencies, if they occur, will be larger.
C3.ai is a mid-cap stock while Palantir is a large-cap stock, so we don't think the value opportunity here is significant. However, there is no doubt that C3.ai provides a better valuation for Palantir at this time, primarily due to investors overall considering Palantir's long-term prospects as a U.S. defense and corporate asset, and as an important company to the United States. This is a result of the fact that people are beginning to realize the high value of Leverage AI for data management. I believe the market is operationally undervaluing C3.ai and its price reflects that. Consider that the company's price to sales ratio is 8.13, while Palantir's price to sales ratio is 21.90. As mentioned above, the lower market support for C3.ai is fully justified by Palantir's more comprehensive capabilities and financial strength.
Additionally, Palantir offers better future growth prospects, assessed based on analyst consensus. Therefore, the most penetrating question when analyzing C3.ai or Palantir's valuation is not whether they are selling below fair value, but rather whether their valuation is reasonable enough to justify growth. I think it's whether or not. In my opinion, Palantir is worth the premium because it has much better future growth prospects and operating value. I accept that Palantir could sell a little cheaper, but I believe we will see a small correction soon. But even if purchased now, I think Palantir will likely significantly outperform his C3.ai over the next 10 years.
risk analysis
As mentioned above, C3.ai faces one of the same significant risks that I recently identified when investigating Palantir. Because of the company's increased exposure to defense, intelligence, and government sectors, it may find that its resource allocation conflicts with corporate interests and domestic and international security measures during wartime. In my opinion, the current global conflict is likely to intensify, and C3.ai may be asked for larger contracts and clearer demands from the US and NATO defense allies.
As a result, development costs are significantly shifted away from the enterprise to defense interests over an extended period of time, significantly reducing its value to enterprise customers during that period, and impacting or changing its reputation upon return to peacetime. There is a possibility. In my opinion, C3.ai's exposure to the military-industrial complex puts shareholders in a delicate position and is subject to changes in strategic focus that may not always be in the best interests of shareholders. are exposed to certain associated risks.
summary
C3.ai is well-positioned to provide AI services to companies looking to become more efficient and automated, but it faces strong competition, particularly from Palantir. Although the company's balance sheet is very strong, its net loss has also increased as its revenue has increased. Additionally, his C3.ai's operational focus may change significantly during times of war, impacting its usefulness and associated value to enterprise customers upon return to peacetime.
While the stock offers good value at the moment, we think investors are likely to see a higher total return from their investment in Palantir over the long term.
disclosure
I currently own a position in the stocks mentioned and have no plans to sell any or all of my position in the stocks mentioned within the next 72 hours.